Thursday, September 28, 2023

Longevity Risk: Insights From Recent Seminars

Longevity is defined by the Merriam-Webster dictionary as “a long duration of individual life.” It is also a key financial risk for older adults (i.e., not having enough saved and outliving retirement savings because this money has to last a long time). A recent study found that 63% of pre-retirees feared running out of money more than death vs. 46% of retired respondents.

Below are six take-aways about some recent seminars that I attended about longevity risk:


   Ticking Time Bomb- One speaker called longevity risk a “ticking time bomb” in financial planning. Since longevity is a big unknown for most people, nobody knows if longevity risk will affect them personally and, if so, what the (financial) damage will be.


   Time Horizon- Most financial experts recommend a savings decumulation plan with at least a 30-year time horizon for people who retire in their mid-60s. It should include essential living expenses, discretionary living expenses, and guaranteed sources of income such as Social Security, an annuity, or a pension.


   Couples Always Have a Survivor- Surviving spouses may outlive their partner for a long time (think decades). They must cope with issues such as lower trigger amounts for taxes on Social Security and Medicare and reduced guaranteed income. For example, instead of two Social Security checks, there will be one, along with a reduced (survivor) pension benefit.


  Guaranteed Income- Three common sources of guaranteed lifetime income in later life are Social Security, (increasingly rare) defined benefit (DB) pensions, and annuities. People without a DB pension may decide to purchase annuities to create their own “pension.”


   Long-Term Care Risk- There is a 70% chance that a person age 65+ will need long-term care (LTC) in later life. Planning strategies to address this risk include purchasing a LTC insurance policy, having adult children pay LTC insurance policy premiums, self-insuring for LTC expenses from invested assets, and moving to a continuing care retirement community (CCRC) where lifetime care is provided in exchange for a hefty entrance fee.


   Need for Daily Structure- A longer life means more time to fill and, as one speaker noted, “It’s a long time…you can’t just sit around.” Another stated “you can’t golf and fish every day.” As I noted in my book, Flipping a Switch, older adults need to replace working hours with other activities (e.g., clubs, hobbies, volunteerism) that take up big chunks of time.


Thursday, September 21, 2023

How to Protect Yourself in Today’s Scary Economic Environment

I recently taught a class with the same title as this post. It began with a summary of recent “scary” economic events: recession fears, rising interest rates, bank failures, volatile stock prices, increased costs of basic expenses due to inflation, layoffs, low savings rates, increasing credit card APRs and household debt, housing unaffordability, and more. 

The remainder of the class described ways for people to protect themselves during uncertain financial times. Below are some key take-aways:


Self-Assess Your Fears- Admit that you are nervous. Then write down your biggest financial fears (e.g., unemployment, homelessness). Next, ask yourself how realistic they are. Also, tune out market “noise” (e.g., daily financial reports on television) if this triggers financial anxiety.


Understand Historical Investment Returns- Avoid market timing, which is generally futile. When people jump in and out of stock investments, they tend to miss key “up days” when markets (and stock prices) rebound. Investment volatility is normal and to be expected.


Control What You Can- Spend less on discretionary expenses to offset higher fixed expenses due to inflation, accelerate debt repayment (snowball or avalanche method), get estate planning documents in order, diversify investments, and develop healthy living habits (e.g., exercise).


Earn More on Your Money- Take advantage of the higher returns from online bank savings and money market accounts and money market mutual funds available through investment companies. To hedge uncertainty about future interest rates, purchase a laddered portfolio of certificates of deposit (CDs) with staggered maturity dates and different interest rates.


Rebalance Your Portfolio- Set target percentage weights for asset classes (e.g., stocks, bonds, cash equivalents) and rebalance periodically by selling over-weighted assets and buying what is underweighted. Sign up for free automatic investment rebalancing services, if available.


Annual Financial Check-Up- Keep tabs on your finances with the following check-up metrics: net worth statement, cash flow statement, spending plan (budget), credit report and score, consumer debt-to-income ratio, and income tax withholding review.


Learn From Your Tax Return- Review your latest tax return and identify changes from previous years. Change withholding and/or quarterly estimated payments if changes are needed. Do a mock-up 2023 tax return each Fall to identify tax-saving opportunities before year-end.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.



Thursday, September 14, 2023

Tax-Deferred Retirement Savings Plans in Later Life

One place where there is a gap in adult financial education is programs for older adults age 65+. The bulk of community and workplace programs cover financial tasks and decisions to get “to retirement,” not “through retirement." 

One of the niche audiences for my business, Money Talk, is older adults grappling with financial issues such as creation of a retirement “paycheck,” paying taxes on required minimum distributions (RMDs), and simplifying financial accounts.


Below are key points from a recent class that I taught about tax-deferred retirement savings plans:

Tax Diversification- There are three types of investments: 1. Taxable accounts outside of retirement savings plans, 2. Tax-free accounts (e.g., Roth IRAs and municipal bonds), and 3. Tax-deferred accounts (e.g., Traditional IRAs and employer plans). Ideally, investors should have investments in all three categories for greater control over their taxable income.


Types of Tax-Deferred Accounts- These include employer-sponsored defined contribution plans (e.g., 401(k), 403(b), 457, thrift savings plan), Traditional IRAs funded with pre-tax dollars, simplified employee pensions (SEPs) for self-employed workers, and annuities.


Account Beneficiaries- It is unlikely that long-time savers with large balances will die without leaving some money in one or more tax-deferred retirement plans. It is wise to periodically review named beneficiaries and prepare a master list for periodic review and/or revision. Beneficiary types include a spouse, non-spouse (e.g., child), and qualified charity (if allowed).


Account Consolidation- Benefits include fewer account management fees, less maintenance (e.g., account logins, tax statements, e-mails, and investment decisions), and greater ease in calculating and withdrawing RMDs and administering a deceased person’s estate.


Direct Rollovers- Custodian A should send account proceeds directly to Custodian B. Indirect rollovers (where an account holder is sent the money) should be avoided because there is a strict 60-day time limit to reinvest the money in a new account and withholding taxes usually apply.


Rebalancing and RMDs- When RMD withdrawals are made, account owners may have to rebalance the asset allocation of their portfolio. In bull (rising) markets, consider selling assets (for a withdrawal) that have appreciated more than others to get back to target percentages.


RMD Calculation- A new life expectancy table took effect in 2022. Simply divide the balance in a tax-deferred account on December 31 of the prior year by the divisor in the table that matches your age. For example, $100,000 ÷ 26.5 (the divisor for age 73) = $3,774 (rounded). As retirees get older, the RMD percentage of their account balance gradually increases.


Account Withdrawal Timing- Account owners can make penalty-free withdrawals from tax-deferred accounts after age 59.5. Those with large balances and those who need money for living expenses may benefit from withdrawals before their RMD start date. Withdrawn money can be used for living expenses, savings in a taxable account, charitable or family gifts, and fun.


This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.



Thursday, September 7, 2023

Building Generational Wealth

This year, my husband and I kept our Christmas tree up until late March by converting it to a red Valentine’s Day tree in February and a green St. Patrick’s Day tree in March.

Back in March, I posted a photo of my tree full of green shamrocks and noted that my grandparents were Irish immigrants who came to America with dreams for a better life and very little money. Despite initial anti-Irish discrimination, over the course of three generations, my family built generational wealth.

Generational wealth is defined as financial assets passed down through successive generations of a family. Example: my grandparents, parents, and me. Transfers are often made through lifetime gifts and inheritances received by younger generations via wills, trusts, and beneficiary designations on life insurance and retirement savings accounts. It can also occur by teaching younger generations “how to fish” to create their own wealth.


How, exactly, do families build generational wealth to pass onto their heirs? Consider these 12 strategies:


Disciplined Spending- A path to wealth is living below your means and saving the difference. Studies have shown that many millionaires have frugal spending habits even though they could easily afford to spend more.


Education- I was first in my family to receive a college degree. My parents’ savings made this possible. Human capital investments via degrees, certifications, and other training generally increase income-earning potential.


Investments- Long-term investing, particularly in a diversified portfolio of stocks over multiple decades, will typically build wealth. Three key tips: start early, invest often, and do not “panic sell” during market downturns.


Real Estate- Some families build wealth through real estate: a primary residence and/or rental properties. Home equity grows over time through completed mortgage payments and increased home and/or land values.


Life Insurance- Life insurance helps protect dependents from wealth depletion when a family breadwinner dies, particularly in early adulthood. It provides cash to repay debts, build survivors’ human capital, and save.


Family Businesses- Entrepreneurship can build generational wealth. It did in my family. My grandparents made/sold Irish whiskey during Prohibition and I started Money Talk as a “side hustle,” turned encore career. My brother has been an entrepreneur for almost 50 years.


Financial Education- People generally learn the most about money from family members. This includes behaviors (e.g., saving and promptly repaying debt) and skills such as reconciling a checking account balance.


Role Modeling- In addition to talking with elders about money, younger generations learn about money through observation (e.g., ATM and credit card use, bill-paying, thrifty shopping habits, and charitable giving).


Multiple Income Streams- Three types of income can build generational wealth: active (wages, salaries, and commissions), passive (e.g., rental properties and royalties), and portfolio (e.g., interest/dividends on assets).


Antiques, Heirlooms, and Collectibles- Property that stays within a family for multiple generations can sometimes appreciate handsomely in value. Think coins, cards, comic books, art, toys, dolls, and classic cars.


Tax Diversification- It is smart for older generations to place assets in a combination of tax-deferred, tax-free, and taxable accounts to mitigate tax impacts from the transfer of wealth to younger generations.


Professional  Advisors- As wealth accumulates, people often reach out to financial planners, lawyers, and tax advisors to help them manage it and preserve as much as possible for successive generations.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

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